Are you wasting your money by renting?
Photo by Brandon Griggs on Unsplash
In the world of real estate, a common refrain is that if you’re renting instead of buying, you’re throwing your money away. I’ve had several realtors tell me that before… but is it true?
The answer is no. Renting is not a waste of money.
The argument against renting is that you’re not putting your money toward a great investment: your home. Look, I own a home, but it’s not part of my investment portfolio. It’s not buying my financial independence. So, I disagree with the notion that a home is a great investment, even after you pay off the mortgage and own the home outright. You still have to consider:
- Did the increase in the value of my home outpace inflation?
- Am I factoring in all the expenses attached to the home over the years?
Buying a house isn’t just obligating you to a mortgage. You’ve got to buy furniture. Repairs are going to pop up, many of them costly. Earlier this summer, I had to pay $3,600 just to fix my air conditioner! The tools needed to upkeep your home require maintenance, like a mower. You’re likely going to make renovations on the house if you stay in it until your mortgage is paid off.
My point is: you might not be factoring those costs in when you consider what you paid to acquire that asset versus what it’s worth when your mortgage is paid off.
The Overlooked Value in Buying a Home
Even if I don’t consider a home a great financial investment, buying one can benefit your quality of life, and that’s important. When my wife and I got married, I was a complete miser despite the fact I was making six figures. I refused to spend money, to the point that my mother-in-law had to step in and buy clothes for my wife, who was a first grade teacher at the time.
Once I adopted a more abundant mindset, we bought a house that was well within our means. We loved and enjoyed that home together. We started having people over and hosting study groups. We had young kids, so they had extra space to run around. The happiness we found in that home was worth the money, and looking back, I’d make that decision again in a heartbeat.
There was an unfinished basement in this home, though, and I spent a lot of money fixing it up and making it finished. Did I get adequate value back when I sold the home for what I put into the basement? No, I did not. Don’t get me wrong: I’m glad I fixed up the basement for the way it improved my life and the lives of my family, even if it wasn’t a sound financial decision.
Avoiding the Lifestyle Trap
Another part of the reason I don’t believe homes are a sound investment is the strategy people use when evaluating their purchase. I know it well because I almost fell into this trap.
Many people don’t buy a house based on the price; they buy based on the monthly payment, so what happens is they end up with more house than they need. This begins a snowball effect of more ongoing costs (e.g. utilities and maintenance) and buying more things to fill the space.
We had a house under contract that fit this definition perfectly: it was way more house than we would have used. I didn’t see that at the time we made the offer, though. Thankfully, my attorney said to me, “Do you really want to move into that big of a home? We have one that size and it’s overkill. We don’t even go to a lot of the rooms.” His comment stopped me in my tracks.
I decided not to close on it and lost the escrow money as a result. We bought a smaller house that fit our family better, which means we accumulate less and give away more. We’ve found it’s a healthier way to think about buying a home—for our wallets and for our wellbeing.
What Else to Consider
There are other factors to consider in the “renting versus buying” equation, one of which is the market in your area. I was asked recently by a woman named Lisa if she should buy a condo given how low interest rates have fallen. With this particular decision, it was important to look beyond just the cost and whether it made sense given the friendly interest rates.
Considering that condos are often a second home, if Lisa owned one in a complex with a lot of snowbirds and the economy took a dive, there would be a lot of vacant units in her building for sale. So if she needed to sell at that time, she’d be facing a ton of competition, which would negatively affect her asking price and the value she could get back when she sold.
There were implications on the other side of that possibility: if Lisa could wait, there might be more opportunities down the road to buy a condo at a better price than she’d get now.
With Lisa, there was also the factor of her financial situation: she had $500,000 in debt, most of it from student loans. That’s why she was considering buying the condo: to invest her money in an asset. Using the same reasoning I shared in this article, I explained that a house wasn’t her best option as an investment. I recommended placing her money somewhere it would be liquid and earn a 4-5% return, like CashflowBanking.com, or using it to pay down her loan. If, for example, she was paying 8% on her loans, it might be a better choice to use her money that way.
Questions to Ask Yourself
There are many great reasons to buy a home—doing so as an investment is not one of them. If I were starting over again today, I would ask myself these questions before buying a home:
- Am I saving enough money?
- Am I paying myself first?
- Have I invested in myself?
- Am I adding tons of value in whatever role I’m in?
- Do I know where to invest to create cash flow?
If I was able to check all those boxes and I wanted to buy a home for my quality of life, or to have a nice place to raise my family, then I’d buy one within my means. If I wasn’t able to, I’d keep renting secure in the knowledge that I wasn’t throwing my money away by doing so.
Source by www.forbes.com